DiscussionNauro Campos/ Yuko Kinoshita

Foreign direct investment, structural reforms, and institutional quality: Panel evidence from Eastern Europe and Latin America

Gabriele Tondl

University of Economics & BA, Vienna

Contribution • Investigate determinants of FDI in emerging markets

results can guide policy makers what to change to become attractive for FDI

• Country sample: – Latin America

– Period 1989-2004

– Countries ranked 2nd (LA), 3rd (TE) among developing countries for FDI inflows

– Transition, overcome macroeconomic instability, big structural reforms

• Hypotheses and model specification– FDI-types: market seeking, resource seeking

– Location factors :• Macro stability

• Infrastructure

• Institutional quality

• Structural reforms: financial sector, privatization, trade liberalization

Contribution II

• Indicators for structural reforms– Reform policies versus reform outcomes

– Careful selection and construction of reform indicators:

– Financial reform index 1 = development of financial market

– Financial reform index 2 = efficiency of financial system

– Trade liberalization:tariff rates + tariff dispersion

– Privatization:receipts of government from disinvestment

• Convincing results:– Robust coefficients: income level (+), inflation (-), telephone lines (+), fuel exports (+),

quality of bureaucracy (+), financial efficiency, privatization

Comments

• Motivation of sample selection?– Why Latin America and Transition countries?

• What do they have in common what divides them?

• Common: Macroeconomic stabilization, privatization, liberalization in both regions

• Common: Weak institutions in both regions

• BUT:

• Different: Transition economies major experienced major drop of economic activity, major share of outdated productions creates a full range of investment opportunitiesnot the case in LA

• Different: TE were completely isolated before 90s, LA not

– Both LA and TE ranked below Asia for FDI inflows, why not compare them with Asia?

Comments II

• Model for FDI determinants: – Missing factors:

– Labour costs: TE served for low wage productions for EU investors, at least temporarily,

Central America serves for low wage productions of US investors.

– Education: literature stressed its importance for investors education is expected to differ a lot in both regions, some TE have quite high education.

Maybe try alternative education indicators, e.g. share of 25 years old with English knowledge

– Countries belong to different trading blocks, e.g. EU association, Andean Community, Mercosur, may have influence on investment

– Not only present trade openness may be important, also years of openness

Comments III

• Sample: Explanation why certain countries from region are missing: – only 3 Caribbean – why not have only Central and South America?– Balkan countries not included – data problems?

• Estimation method system GMM:– Why use the estimator system GMM? – Which variables are considered to be endogenous?– Which are the arguments (literature) why they should be endogenous?– Which instruments are proposed in the literature– Instruments:

Can the instruments used with system GMM be considered to be suitable instruments? Are lagged values valid instruments? In developing countries series show big changes. Lags of more than t-1 are often poorly correlated with variable.

– Econometric problem non-stationarity:– A number of series can be considered to be non-stationary (typical in developing

countries) – GDPp.c., infrastructure, trade liberalization, etc… – Explanation if system GMM is appropriate in this context

Comments IV

• Results: – Instruments are not explained: for which series IV

– What lag length was used? How was lag length of instruments determined.

– Explain which options were used for estimation: e.g. one-step or 2-step estimates

– Explain the test statistics